MUMBAI, Oct 11 Stressed loans in India's banking
sector crossed $138 billion in June, central bank data reviewed
by Reuters shows, an increase of nearly 15 percent in just six
months that suggests a state clean-up effort will take longer
and cost more than expected.

Fixing the mountain of bad debt weighing down India's banks
is vital for Prime Minister Narendra Modi's government to revive
weak credit and investment growth and put a faltering recovery
in Asia's third largest economy on a firmer footing.

India's central bank has set a March deadline for banks to
fully reveal problem loans on their books. When lenders disclose
bad loans, they need to take writedowns that hit their bottom
line and eat into equity.

The end-December $121 billion figure has been cited by the
government and bankers as the peak of stressed assets in the
banking sector.

Stressed assets include both non-performing loans (NPLs) -
defined as those that have not been serviced for 90 or more days
- and restructured or rolled over loans, where banks have eased
interest rates or the repayment period.

India's nearly two dozen state banks, which dominate the
sector and account for 88 percent of the bad loans, already need
$27 billion in new equity capital by March 2019 to meet tougher
global banking rules known as "Basel III".

BALANCE SHEET CLEAN-UP

The surge in stressed loans will mean banks need even more
cash to shore up their balance sheets - funds that will have to
come from the government as their ability to raise money through
stock or bond sales is constrained by low profits and poor
valuations.

State-run lenders accounted for about $122 billion of the
total stressed loans as of June, while private sector lenders
had $14 billion, according to the central bank data. Local
operations of foreign banks had about $2.3 billion in stressed
loans.

Bankers have previously said that, while the number of
non-performing NPLs kept rising after an asset quality review
ordered by the central bank earlier this year, the overall
number of stressed loans was not going up - instead, loans
earlier restructured were falling into the NPL category.

The numbers obtained by Reuters, however, show the overall
number of stressed assets continuing to rise.

"The impression we have is that the numbers are certainly
going to go up," said Saswata Guha, a director at Fitch Ratings,
which estimates Indian banks' total capital requirement to be as
much as $90 billion through March 2019, with state banks
accounting for the bulk of it.

Guha estimated NPLs in the current financial year would rise
by 35 to 40 percent. For the state banks it would be much
higher, he said.

"The pressure of provisioning is going to be very, very
significant," Guha said. "I won't be surprised if some of the
banks continue to report losses in the coming quarters."

Most analysts reckon the struggling state-run lenders will
need far more than the $10 billion the government plans to
inject into them over a four-year period to March 2019.

The government has yet to specifically say if it will raise
the cash injection, but Finance Minister Arun Jaitley has said
the administration was solidly behind the banks.

As focus on cleaning up banks has intensified, credit growth
has fallen to two-decade lows, threatening economic expansion
and investment.

Economic growth slowed to 7.1 percent in the April-to-June
quarter, below the 8 percent level seen as necessary to maintain
full employment and challenging Modi's pledge to create 250
million jobs over the next decade.

MORE PAIN TO COME?

NPLs as part of the stressed loans total jumped to about
$101 billion, from $65 billion in December.

Adding to the banks' woes, the data shows another 1.93
trillion rupees ($29 billion) worth of loans as of June that
were not yet classified as "stressed" but on which borrowers are
more than 60 days behind on interest or principal payments,
putting those at high risk of becoming NPLs.

The central bank and the government have announced new
schemes to tackle stressed assets, albeit with little success
yet.

A debt-for-equity swap scheme unveiled by the central bank
has found few takers, although a host of foreign investors have
this year announced investments in Indian distressed debt after
an easing of regulations by the government.

India's newly-appointed central bank Governor Urjit Patel
has said the regulator will deal with the bad loans situation
with "with firmness but also with pragmatism".

Patel's predecessor Raghuram Rajan, who had ordered the
asset quality review and called for a "deep surgery" of the bad
loans, had been criticised by some that the excessive focus on
clean-up was choking credit growth.
($1 = 66.5919 Indian rupees)